Apple and Spotify Create Ripples in the Streaming Music World

The arrival of Apple's iCloud and iTunes Match this month, coupled with Spotify's October drop of its invite-only requirement, seem to have shaken the online music world.

All the other online music service players seem to be desperately searching for ways to compete. Consider a few of these recent changes in the past few weeks:

On October 6th, Pandora sent an e-mail to many users of its free net radio service informing them that it had "removed the monthly listening limit" of 40 hours. The limit was officially killed and replaced by a "soft limit" of 320 hours in September when Pandora introduced its major HTML5 site redesign.

The same day, Rdio announced a new free option that, unlike Pandora, has no ads, but also comes with a total listening time limit.

In September, MOG introduced a free option that gives users a music "gas tank" of listening credit that can be filled by exploring the site and eventually, by viewing ads and other promotions.

"I think the iCloud and Spotify efforts were a wake-up call that some of these properties had better combine or die," analyst Rob Enderle of the Enderle Group told PCWorld in an e-mail discussion about the Rhapsody-Napster deal. "I think there are simply too many players in the market right now."

More evidence of crowding in the area of streaming came at Facebook's f8 conference where the social network announced integration with not just Spotify, but also MOG, Rdio, Rhapsody, and Slacker. It seems everyone in the crowd is grasping at the same straws to grow its audience, and of course, Facebook is the biggest straw in the pile.

But a big user base won't be enough for success, says Gartner analyst Mike McGuire. He says Rdio and MOG aren't just interested in grabbing more users for their free service. They are grasping at ways to grow their pool of potential paid subscriptions.

"It's all about customer acquisition," says McGuire. "How do you get the "freemium" model to move the listeners to the point where they're actually paying?"

"Sucking the Air out of the Room"

It's difficult to know exactly which service is doing the best job of converting the most free users into paying customers. The services rarely release any subscriber figures or information, but McGuire says there's plenty of competitive pressure coming from both Apple and Spotify.

"Spotify clearly, at least in terms of PR and press, has kinda sucked the oxygen out of the room," he said.

The Europe-based service has garnered the most media attention since its mid-summer launch, undoubtedly due in part to its success in other countries and long-awaited arrival in the United States.

But Spotify has also stumbled. Its invitation system was somewhat confusing and tempered the launch, and when that requirement was lifted, it met a new controversy with the requirement that users have a Facebook account. That gripe has since been addressed, but there are pervasive complaints about the amount of Spotify royalties that trickle down to artists.

Still, the momentum seems to be with Spotify. In late September, Spotify announced two million subscribers internationally. According to the New York Times and public filings in Britain, where Spotify is headquartered, the service had 1.6 million paid subscribers at the time of its U.S. launch. So it's a safe bet that paid U.S. user numbers total less than 400,000.

It was reported in early August that the service had already garnered 175,000 paid American users—that's an impressive amount when compared to Rhapsody, the largest digital music subscription service in the United States, which had 800,000 paying customers before it bought Napster, an audience it had several years to build up. It's also worth noting that Spotify is believed to have another 10 million users on ad-supported free plans.

Giant Apple in the Room

Apple iTunes MatchWhile Spotify might represent the biggest near-term threat for smaller streaming services, Apple is the giant elephant in the living room.

Gartner's McGuire doesn't think Apple is likely to compete head-to-head by offering a subscription service anytime soon. He points out that iCloud and iTunes Match provide syncing rather than streaming. Match will basically sync all music files, including those not purchased from iTunes, for an annual fee.

"It's less about subscriptions and more about extending value of the ownership model," explains McGuire. "We're still seeing consumers who are more interested in ownership… versus the subscription services."

The central role of the iTunes store in that ownership model has more than just the streaming services a little bit freaked out. "The (music) labels are also rooting for streaming services as a counterpoint to iTunes," adds McGuire, pointing to the record industry's fear that further growth of the massive media store could give Apple more leverage in dictating future terms.

Unfortunately for everyone else involved, Apple has something they don't--a gigantic pile of billions of dollars just lying around allowing them the luxury of not worrying about trivial concerns like profits.

Spotify, on the other hand, actually saw its losses grow in 2010, according to recent financial statements.

In its defense, Spotify says it was busy investing in itself, and also isn't particularly concerned with profits just yet.

"Product development remained a priority in 2010," read a statement from the company. "With ongoing investment… including social features and the ability to combine local files with our own library of millions of tracks… (and) laying the foundations for new market launches, most recently launching in the U.S. in July of this year."

McGuire thinks that for Spotify and the other streaming services, their real costs come from the core of their business—the royalties they must pay to the record labels. He says the constant possibility of increased royalties poses an "existential threat" to Rdio, MOG, and even Spotify, despite the latter's international success.